Sun Micro fails to shine

SAN FRANCISCO: Network computer maker Sun Microsystems Inc. on Tuesday reported quarterly profit fell 80 percent as revenue declined for the ninth consecutive quarter on weak demand for computer servers.

Shares fell almost 10 percent in after-hours trade in reaction to the lower earnings, which excluding items, were below the average Wall Street estimate.

"The quarter's performance is certainly uninspiring," said Richard Chu, an analyst at SG Cowen.

Sun, which designs most of the components for its servers, in contrast to most rivals, who buy software and hardware from large suppliers, spent $1.84 billion on research and development in fiscal 2003, up slightly from 2002.

While spending on information technology has been moribund for the past three years, Sun has been hit harder than most of its rivals.

Sun is also making some big bets with its N1 computing architecture, which aims to automate tasks like provisioning storage and computer power by knitting together a network into a single "virtual" machine rather than a patchwork of parts.

Sun, the No. 3 maker of computer servers, also has new versions of its Ultrasparc microprocessor due out in the current fiscal year as well as its Orion server software offering.

"Much of that is very focused on deliverables that are many quarters out," Chu said.

To spur sales, Sun has been pushing more aggressively in servers that cost less than $100,000 and had in its just-completed fiscal year launched some 20 servers in the low-cost space, several of which use chips made by Intel and Sun's Solaris version of the Unix operating system.

For its fiscal fourth quarter ended June 30, Sun Microsystems SUNW.O said it had net income of $12 million, or nil cents a share, down 80 percent from $61 million, or 2 cents, a year ago. Revenue fell 13 percent to $2.98 billion from $3.42 billion.

Sun Chief Executive Scott McNealy said that compensation plans for employees and executives in its new fiscal year, which began in July, are geared toward improving revenue and profits.

SUN FAILS TO SHINE

"Obviously, we're dealing with a pretty tough year," McNealy said on a conference call with analysts. "We're not happy with it, and we've got all our energy focused on growing revenues and generating profits."

Analysts had forecast Santa Clara, California-based Sun to post a profit of 2 cents a share, within a range of nil per share to 4 cents a share, on revenue of $3.06 billion, according to Reuters Research, a unit of Reuters Group Plc.

Excluding items, Sun posted earnings per share of a penny compared with 2 cents in the prior-year period.

Sun cut costs, as it has in recent quarters, slashing selling, general and administrative costs by almost $500 million on an annual basis. The company's total cost of sales narrowed by 16 percent to $1.68 billion from $2.01 billion in the year-ago quarter. Operating expenses also declined, by 3.8 percent, to $1.30 billion from $1.35 billion.

Gross margin, a closely watched measure of profitability, was 43.7 percent, 2.4 percentage points higher than the year-earlier quarter, Sun said.

Chief Financial Officer Steve McGowan told analysts on a conference call that gross margin in the current quarter would narrow from the fourth quarter, citing continued aggressive pricing and narrowing margins in its services business.

He did not provide a forecast for revenue or profit, in keeping with the company's practice in recent quarters.

Gross margin narrowed from the prior quarter because of aggressive pricing and component costs, particularly in memory chips, that did not decline as much as had been anticipated.

Shares of Sun slipped to $4.30 in extended trading after the release of its earnings report. The stock had climbed 21 cents to $4.77 in regular Nasdaq Stock Market trading.

The stock has rallied by about 30 percent since early May even after the after-hours decline

© Reuters